Spatial Price Transmission of Milk Prices Among the Visegrad Countries

Abstract

Abstract When trading with homogenous goods, consumers are not able to distinguish between individual goods and thus not willing to pay a higher price, if the same product is available for lower price. This leads to an interesting effect, when prices of homogenous goods in different locations in an open market tend to get closer. It is the result of the so-called Law of One Price. Because of the Law of One Price, producers are affected not only by vertical price transmission, but also horizontally. The aim of this paper is to assess the linkage and patterns among the prices of cow’s raw milk in the V4 countries. We apply the price transmission methodology, such as unit root tests, cointegration tests, error correction models, and Granger causality tests. Monthly data for producer prices of raw milk are used, covering the period from January 2005 to June 2017. Our results confirm the existence of the Law of One Price when milk producer prices in different locations are co-integrated.